Responding to darkening economic outlook
As Group of 20 ministers and central bank governors meet in Bali over this weekend, they face a global economic outlook that has darkened significantly. When the G20 last met in April, the International Monetary Fund had just cut its global growth forecast to 3.6 percent for this year and next—and we warned this could get worse given potential downside risks. Since then, several of those risks have materialized—and the multiple crises facing the world have intensified.
It is going to be a tough 2022, and possibly an even tougher 2023, with increased risk of recession. That is why we need decisive action and strong international cooperation, led by the G20.
Our new report to the G20 outlines policies that countries can use to navigate this sea of troubles. Let me highlight three priorities.
First, countries must do everything in their power to bring down high inflation. Why? Because persistently high inflation could sink the recovery and further damage living standards, particularly for the vulnerable. Inflation has already reached multidecade highs in many countries, with both headline and core inflation continuing to rise. This has triggered a monetary tightening cycle that is increasingly synchronized: 75 central banks, or about three-quarters of the central banks we track, have raised interest rates since July 2021. And, on average, they have done so 3.8 times. For emerging and developing economies, where policy rates were lifted sooner, the average total rate increase has been 3 percentage points—almost double the 1.7 percentage points for advanced economies. Most central banks will need to continue to tighten monetary policy decisively. This is especially urgent where inflation expectations are starting to de-anchor. Without action, these countries could face a destructive wage-price spiral that would require more forceful monetary tightening, with even more harm to growth and employment.
Second, fiscal policy must help, not hinder, central bank efforts to bring down inflation. Countries facing elevated debt levels will also need to tighten their fiscal policy. This will help reduce the burden of increasingly expensive borrowing and, at the same time, complement monetary efforts to tame inflation. In countries where recovery from the pandemic is more advanced, shifting away from extraordinary fiscal support will help tamp down demand and thus reduce price pressures.
Over the medium-term, structural reforms are also crucial to bolster growth: Think of labor market policies that help people join the workforce, especially women. New measures must be budget-neutral— funded through new revenues or expenditure reductions elsewhere, without incurring fresh debt and to avoid working against monetary policy. This new era of record indebtedness and higher interest rates makes all this doubly important. Reducing debt is an urgent necessity—especially in emerging and developing economies with liabilities denominated in foreign exchange that are more vulnerable to tightening global financial conditions and where borrowing costs are surging.
Emerging economies with a greater reliance on domestic borrowing, such as in Asia, have been more insulated. But a broadening of inflation pressures and the attendant need to tighten domestic monetary policy faster could change the calculation. The situation is increasingly grave for economies in or near debt distress, including 30 percent of emerging market countries and 60 percent of low-income nations. Again, the Fund is here for its members offering tailored analysis and advice, and a more agile lending framework to support countries in times of crisis. That includes emergency financing, increased access limits, new liquidity and credit lines, and last year’s historic SDR allocation of $650 billion. Beyond these efforts, decisive action by all involved is urgently needed to improve and implement the G20’s Common Framework for debt treatment. Large lenders, both sovereign and private, need to step up and play their part. Time is not on our side.
Third, we need a fresh impetus for global cooperation—led by the G20. To avoid potential crises and boost growth and productivity, more coordinated international action is urgently needed. The key is to build on recent progress in areas ranging from taxation and trade to pandemic preparedness and climate change. The G20’s new $1.1 billion fund for pandemic prevention and preparedness shows what is possible, as do recent successes at the World Trade Organization. Most urgent of all is action to alleviate the cost-ofliving crisis, which is pushing an additional 71 million people into extreme poverty in the world’s poorest countries, according to the United Nations Development Program. As concerns over food and energy supplies increase, risks of social instability are rising.
To avoid further hunger, malnutrition, and migration, the world’s wealthier countries should provide urgent support for those in need, including with new bilateral and multilateral financing, especially through the World Food Program. As an immediate step, countries must reverse recently imposed restrictions on food exports. Such restrictions are both harmful and ineffective in stabilizing domestic prices. Further measures are also needed to strengthen supply chains and to help vulnerable countries adapt food production to cope with climate change.
As the G20 meets to navigate the current sea of troubles, we can all take inspiration from a Balinese phrase that captures the spirit that is needed more than ever—men
yama braya, “everyone is a brother or sister.”